Private Turmoil

It might be the ultimate challenge of private label against big brand.

While few retailers have had an easy time launching their own line of bottled water or even snacks, hatching a private-label (PL) cigarette in the space of Marlboro, Camel and Newport?

“I think retailers are looking at all these (manufacturer) contracts and the restrictions and saying, ‘If we’re going to offer a low-priced cigarette, we might as well get as much margin as we can out of it,’ ” says UBS senior tobacco analyst Nik Modi. “That’s certainly something private label helps capture.”

In less than two years, a number of major and midsize operators have launched their own private-label cigarettes. Just this past March, North America’s second-largest c-store chain, Alimentation Couche-Tard, introduced the proprietary Crowns cigarettes to all U.S. Circle K locations. The company cited growing frustrations with PM USA’s MLP-suggested cigarette-pricing strategy as the thrust behind its launch.

And on an earnings call in March, Couche-Tard CEO Alain Bouchard dis­cussed the company’s foray into an arena where brand is almost everything. “We launched the Crowns brand in all our divisions, and we’re very, very excited with it,” Bouchard said. “The market share we have taken so far after such a short period [of time] exceeded our year target after five weeks.” Couche-Tard declined further comment for this story.

Couche-Tard is far from alone in this venture; several other major retailers have rolled out proprietary private-label ciga­rettes. Some of these operators talked to CSP on condition of anonymity, citing proprietary concerns as well as the pos­sibility of antagonizing key suppliers.

One retailer that spoke for attribu­tion and has been in the private-label game a while is Boulder, Colo.-based Smoker Friendly. With its first private-label tobacco products hatched in 1994, Smoker Friendly was an early pioneer of this movement.

“We wanted to create a point of differ­ence in our stores and build a customer base on our own brand,” says vice presi­dent of trade marketing Mary Szarmach.

However, private-label cigarettes are no longer limited to tobacco-centered operators such as Smoker Friendly.

“When you look at our total store sales, so much of the convenience industry is just tobacco,” explains one Southern retailer who has embraced private-label smokes. “If you want to be in private label, you kind of have to be in the tobacco game.”

According to several officials inter­viewed for this feature, a series of factors has contributed to this newfound interest in private-label cigarettes. Specifically:

Economy and High Taxation: Retailers frustrated with declining ciga­rette margin are looking for PL to bolster their take-home profits.

Manufacturer Contracts: From MLP to reduced buybacks and market­ing incentives, manufacturers are trying to hold onto as many dollars as possible within the declining cigarette category.

Narrowing Gap: It wasn’t long ago that retailers observed a price gulf between premium and discount brands. Today, the gap has been narrowed, leaving an opportunity for PL to stand out as a value alternative.

“Major manufacturer promotions have closed the gap in retail price between premium and value-priced products,” said one operator who introduced a private-label cigarette last year. “PL is perceived as a way to widen this gap in retail price and drive customer value.”

While PL represents a smidgen of the company’s total cigarette sales, the retailer, who spoke on condition that nei­ther he nor his chain be identified, said he will continue to review his private-label brand’s performance and customer acceptance.

Changing Market

By all accounts, private label represents a minuscule percent of total cigarette sales. That said, a closer look at preliminary numbers from the NACS State of the Industry Report of 2011 Data shows a subgeneric/private-label segment that is generating more than $2.2 billion in annual c-store sales, closely rivaling branded discount’s performance as a viable complement to premium.

And based on trajectory, one could argue that the subgeneric/private-label segment may hold greater potential than branded discount, considering the former saw unit sales increase 2.2% in 2011, as opposed to a 10% decline in unit sales for branded discount.

And then there’s the sluggish econ­omy, which has given rise to a wallet-con­scious consumer more willing to embrace generic and PL brands. “Ultimately,” says the Southern retailer, “when you look at private label with the economy, it really gained a lot of traction during the time that the economy was down.”

Szarmach has also noticed how the economic climate has changed the market for PL cigarettes. “Typically our private-label offerings have attracted a value-priced customer,” she says of Smoker Friendly’s early proprietary market draw. “Now, like all private-label consumer products, that demographic has grown to become more accepted.”

But can private-label cigarettes con­tinue to grow as the economy stabilizes and brand-name manufacturers flood the market with lower-priced, second-tier offerings?

Modi, for one, remains skeptical. “I think it’s a trend that retailers will use now and then, but I’m not sure how sustainable it is,” he says, citing a simi­lar private-label trend in the 1990s that prompted Philip Morris’ famous Marl­boro Friday.

Furthering Modi’s belief is aggres­sive pricing in the nonpremium sector, spurred by Philip Morris, R.J. Reynolds and Lorillard—a factor not lost on our anonymous retailer. “It’s been a difficult business because the brands are almost waging war against private label,” he says. “We’re getting into contracts where there are four brands at the lowest price point.”

Notably, the major cigarette makers are upping marketing efforts on dis­count brands such as Pall Mall, L&M and Maverick.

However, it’s unclear if the top three are waging war against private labels or each other. The “battle of the brands” going on at the lowest price points was a hot topic of Bonnie Herzog’s “U.S. Tobacco Trends and Insights” talk at the 2012 NATO Show. (For more on Reynolds, PM USA and Lorillard’s “battle of the brands,” see CSP’s June 2012 NATO Show coverage.)

‘Brand-Conscious Industry’

Whether the new focus on second-tier brands is aimed at crushing private label, brand-name competition or both, major manufacturers are succeeding at control­ling both the lower and higher ends of the cigarette price spectrum, making it increasingly difficult for new private-label offerings to take off.

“I think it’s really about the manufac­turers and their price-gap management,” Modi says. “If you’re going to pay $5, why not pay $5.30 and get a Marlboro instead of an unrecognized national brand?”

While there are undoubtedly custom­ers who do go with a brand name over private label, that’s not always the case.

“Even though we currently have three brands that are priced at the same price point as our private label, we still have loyal customers and we’re still doing fairly well with it,” claims the Southern retailer, although he admits the company’s pri­vate-label cigarettes are not performing as impressively as they have in years past.

“In the end, this is a very brand-conscious industry,” says Modi. “There is a subset of consumers who don’t really care, but they’re a very small portion. That’s why private label is such a small piece of the industry.”

And it’s not just the percentage of customers looking for the lowest-price option that private label retailers need to worry about—it’s the type of customer private label attracts.

“One thing to be concerned about is the unintended consequence of trading down your consumers if you become very private-label-focused,” Modi warns. “The overall in-store basket of a private-label consumer is definitely not as good as one of a premium consumer. You have to be very wary of the kind of shopper that you’re attracting into your store.”

With such a small market share and sometimes less-than-ideal customer base, retailers such as United Refining Co.’s War­ren, Pa.-based Kwik Fill/Red Apple have stopped producing private-label tobacco products. Kwik Fill/Red Apple could not be reached for comment on this subject.

“In the end,” Modi says, “brands still matter. That’s why the major brands still have as much, if not more, market share today than they did five years ago, in spite of a very tough environment.”

Still, companies are standing behind their private-label products, with support that begins at the top.

“We’re looking at private label as something that we want to drive and something that we’re very focused on all the way throughout the organization,” says the anonymous retailer. That focus includes building more large-format locations to be able to offer more private-label products, including cigarettes.

Smoker Friendly is also looking to drive its private-label brands, with Szarmach citing “choosing which new items to expand our private-label tobacco family” as her company’s biggest chal­lenge with private label.

While an improving economic climate and growing competition from branded discount will certainly affect retailers marketing proprietary cigarettes, many retailers are ready for the challenge.

“Do we think that we can alter our strategies a little bit? Yes,” says the South­ern retailer. “But it’s definitely a game that we want to play in.”

Since 2003 CSP magazine has ranked No. 1 in readership and market share over all other industry publications. C-store marketers have identified CSP as the preferred magazine source for their trade marketing communications. With industry-leading, highly targeted circulation to more than 100,000 subscribers, CSP reaches the key convenience retailing decision-makers fifteen times a year.